Banks are in a tight spot with deposit growth not matching growth in credit and liquidity conditions being tight. With statutory requirements also curtailing their ability to lend, they are increasingly turning to market borrowing through certificates of deposits, which come at a higher rate.

This is likely to accelerate the transmission of the rate hikes to outstanding loans.

According to the latest RBI bulletin, issuance of certificates of deposits by banks for the period between April 2023 and January 2024 amounted to ₹6.2-lakh crore.

This was 15 per cent higher than the ₹5.4-lakh crore of funds mobilised by banks through CDs in the same period last fiscal. The bulletin states, “Banks’ reliance on the issuance of CDs has increased this year amidst robust credit growth without commensurate growth in deposits.”

This additional fund raising is however taking place at a high cost. The three-month CD rates have risen from 7 per cent last September to around 7.8 per cent by mid-February 2024. Three-month CP rate for NBFC borrowers has increased at a faster clip, from 7.2 per cent to almost 8.5 per cent in the same period.

Why CDs?

Aggregate bank credit peaked at 18 per cent in July 2022 and has been hovering around 16 per cent over the last 12 months. Aggregate deposits growth, though showing improvement, is still at a slower 12 per cent since last May. This is creating a wedge of around 4 percentage points between credit and deposit growth. If seen in terms of incremental credit and deposit, the latest credit deposit ratio stands at 96.9 per cent.

The RBI explains, “With the statutory requirements for CRR and statutory liquidity ratio (SLR) at 4.5 per cent and 18 per cent respectively, only around 77.0 per cent of deposits were available with the banking system for credit expansion as on January 26, 2024. The deposit base is being supplemented by issuances of CDs.”

Impact of higher CD purchases

With the market borrowings of banks coming at a higher rate, banks’ cost of funds is increasing.

Need for more funds is also resulting in hikes in deposit rates. Weighted average domestic term deposit rate (WADTDR) on fresh and outstanding deposits went up 246 bps on and 180 bps, respectively, between May 2022 and December 2023.

The increase in cost of funds is going to lead to increase in lending rates, which has been slow due to a large part of loans being linked to MCLR (marginal cost of funds-based lending rate). The weighted average lending rate (WALR) on new Rupee and outstanding Rupee loans have gone up 181 bps and 113 bps, from May 2022 to December 2023, according to the RBI. The transmission, especially on outstanding MCLR-linked loans, can improve going ahead.

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